Donald Trump is creating chaos at the IRS
TO GET A sense of how bad things got in the recent past at the Internal Revenue Service (IRS), America’s primary tax-collecting agency, consider a photo posted on Twitter by a Treasury advisor in 2022. It depicts the cafeteria at the organisation’s offices in Austin. Nobody is eating. Rather the entire floor is engulfed in paper files. During the pandemic, with offices closed, returns filed by post—which still have to be manually transcribed into computers—piled up. By summer 2022 there were 21m unprocessed paper tax returns. The wait to speak to an IRS staff member on the phone rose to nearly 30 minutes—for the 20% able to get through. Erin Collins, the National Taxpayer Advocate, a watchdog, wrote at the time that “paper is the IRS’s kryptonite, and the agency is still buried in it.”
In the past three years, things have improved immensely. Around 9% of Americans still file paper returns, but these no longer swallow cafeterias. Telephone waiting times are down to three minutes. Most tax returns due on April 15th this year have already been processed (though not all of the paper ones). Over 75m tax refunds, worth over $228bn, have already been sent out, for the most part electronically. This year 30m people were eligible to use a new tool, Direct File, instead of paying for a preparer or accounting software. The tool fills in income details automatically from IRS records. Americans should cherish these improvements. It may be the last time filing taxes is this efficient for a while.
Donald Trump’s administration has unleashed upheaval at the IRS. It is most apparent at the very top. So far this year, the service has averaged a new acting commissioner a month. The latest, Michael Faulkender, who is also deputy secretary of the Treasury, took office on April 18th, replacing Gary Shapley, who served for just two days. Mr Shapley, a former enforcement agent who became a MAGA hero after he alleged that the IRS was “slow walking” its investigation into Hunter Biden, Joe Biden’s son, was ousted at the instigation of Scott Bessent, the treasury secretary. Mr Shapley had apparently been installed by Elon Musk, the head of the Department of Government Efficiency, or DOGE. According to Axios, a news website, after Mr Bessent found out, he and Mr Musk got into a shouting match in the West Wing of the White House, within earshot of Mr Trump. Mr Bessent won, and Mr Shapley left.
He had replaced Melanie Krause, who took over in late February. She resigned after taking Mr Musk’s offer of “deferred resignation.” Ms Krause in turn had replaced Mr Trump’s first acting commissioner, Douglas O’Donnell, who retired early after barely a month in post. The departures at the top have been accompanied by far more below. Around half of senior positions at the agency have seen turnover since January. These include the agency’s chief counsel, or head lawyer, who was replaced in March.
The cause of all of this turnover seems to be what Mr Trump and Mr Musk want the IRS to do. For the past month or so software engineers associated with DOGE have been trying to knit together various government databases to create a masterfile to help deport immigrants. Each year, millions of undocumented immigrants pay some $66bn in federal taxes using bogus or borrowed Social Security numbers or taxpayer-identification numbers. Their tax filings would be a treasure trove for immigration enforcement, not least as they include home addresses. For months DOGE has been negotiating access.
The problem is that, under a law passed in 1976, in the wake of Richard Nixon’s resignation, public officials are expressly banned from sharing taxpayer data. There are a few exceptions allowed, but only for serious criminal investigations. Immigration violations are not covered. This is tricky for DOGE to get around. The risks to officials of breaking the law are significant, stresses Philip Hackney, a former IRS lawyer who is now at the University of Pittsburgh. “If you disclose taxpayer information, it’s a criminal offence,” he says. Rarely are individual civil servants exposed to personal criminal jeopardy if they take action deemed legal by their superiors. Here they could be. Both Mr O’Donnell and Ms Krause were uncomfortable with the data sharing demanded by DOGE.
The use of IRS data for immigration enforcement is not the only questionable aspect of Mr Trump’s ambitions for tax collection. He has also called for Harvard University to lose its non-profit status. This would also be legally extraordinary, and a dramatic escalation in the president’s feud with the Ivy League, if it happened. To strip an organisation of its charitable status, the IRS must show malfeasance, by means of an audit. And a law passed in 1998 specifically forbids the president from ordering an audit of a specific taxpayer. Yet fears persist that Mr Trump may find a way. This would be risky. Messing with the IRS not only helped topple Nixon. In Mr Musk’s native South Africa, the takeover of the South African Revenue Service by friends of President Jacob Zuma was the worst example of what South Africans called “state capture”. It ultimately contributed to Mr Zuma’s fall.
Even if Mr Trump is not vulnerable politically, the outlook at the IRS is not good. It is not only senior officials leaving. Last year the IRS employed 100,000 people. Since then some 20,000 workers have agreed to take deferred resignation while some 7,000 probational employees have been fired (a lawsuit is ongoing, and they were reinstated, but are now all on leave). The agency is planning bigger cuts through more formal processes. Staffing may now fall to historic lows. The biggest reductions are likely to hit staff devoted to enforcement—according to plans submitted to the Office of Personnel Management, which manages much government HR, the number of tax cops will be halved.
Republicans have long equated tax enforcement with tyranny. But Congress would also like to find revenue and savings to offset the renewal of tax cuts enacted during Mr Trump’s first term. Personnel reductions at the IRS will shrink revenue at a time when the deficit is approaching $2trn. According to the Yale Budget Lab, a research group, a 50% reduction in IRS headcount would cost from $395bn to $2.4trn over ten years, depending on how much tax evasion increases.
In theory, the IRS could try to do more with fewer workers. Indeed, by piloting things like Direct File, it had been trying. But the service was already pretty lean. By comparison, Britain’s tax agency employs 66,000 people. America’s post-pandemic backlogs were fixed largely because, under Joe Biden, the Inflation Reduction Act poured money into the agency. “We didn’t have the ability to test and launch technology immediately,” says Danny Werfel, the last Senate-confirmed IRS commissioner. Instead, he says, “we solved those problems with a hiring surge.”
Mr Trump’s reductions in force at the IRS are not likely to increase the pace of modernisation. Already, Direct File is on the chopping board, despite largely positive reviews from users. In fact, the president prefers to talk about disbanding the agency altogether. His pick for full commissioner, not yet considered by the Senate, is Billy Long, a former congressman from Missouri. Mr Long, who has almost no tax experience, previously proposed several bills to abolish the service outright, and replace the income tax with a national sales tax. For now, insiders say the paper files are already stacking up again. Better clear the cafeteria. ■
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